My article in last weekend’s Sun Herald on negative gearing resulted in a flood of emails, many of which supported me, and many which did not. That’s fine – a debate is always good – but it’s also important to put the facts out there.
I made the point that most people who negative gear are ordinary Australians in lower tax brackets. A couple of readers claimed this was nonsense, citing figures showing that the tax breaks through negative gearing went to the top two tax brackets. When you look at the structure of our tax system that’s obvious. If you have a progressive tax system that involves giving a tax deduction in some circumstances, the biggest benefit must go to the highest income earner. They are the ones paying the highest tax anyway.
On the latest figures I have, there are 251,000 individual taxpayers (1.5%) who pay 26% of the total income tax. They are in the top bracket. In the second-top bracket there are 1.6 million taxpayers (9.4%) paying 35% of the total income tax. This means that 10.9% of taxpayers pay 61% of the total income tax.
If you have a taxable income of less than $80,000 a year, either you are reducing it because of your negative-gearing deductions, or you cannot afford to take on an investment property that requires propping up every month out of your own cashflow.
But, as Margaret Lomas points out, most people who negative gear into residential property are positively geared within five years. Looking into the future, most investors in residential property will not qualify for the age pension because of their level of assets, and will be forced to sell property to provide funds to live on. That should trigger a big capital gains tax bill, which would be far greater than the small amount of tax deductions they claimed in the early years.
Other readers claimed that very high-income earners such as medical specialists were the biggest “abusers” of negative gearing. In my experience that’s simply not true. High-income earners fall into two categories: those who spend so much on overseas holidays and school fees that they are always in debt; and those who are good money managers, who tend to invest in property syndicates, development projects, and maybe their own premises. I have yet to meet one with a swag of residential investment properties.
There is one element of the Labor proposal which is frightening. That is to restrict negative gearing to new homes only. It’s a basic property principle that you make your money in real estate by looking for a run-down property in a great location and add value to it by cheap renovation. By restricting negative gearing to new properties, ordinary investors will be enticed to buy new properties where the profit has already been made by the developer.
This will not affect the wealthy. Because of the continual attacks on superannuation, a wealthy person with $180,000 in the bank is hardly likely to contribute it to superannuation as a non-concessional contribution. They are more likely to use it as a deposit on a top established property – the deal will be positively geared from the outset because of their big deposit.